Temecula, CA (PressExposure) September 23, 2009 -- New tax laws affecting Roth IRA conversion rules allow millions of Americans to benefit from more tax-free retirement income, according to financial advisor John Dubots, who writes about the changes on his financial services blog at [http://www.johndubots.com].
The Tax Increase Prevention and Reconciliation Act (TIPRA) was signed into law by the President on May 17, 2006. One of the revenue raising provisions of TIPRA is the elimination of the eligibility rules for Roth IRA conversions. But, this provision in not effective until 2010.
Currently, a taxpayer with Modified Adjusted Gross Income (MAGI) over $100,000 or who has a filing status of married filing separate was not eligible to convert to a Roth IRA. Those restrictions disappear as of January 1, 2010 allowing anyone with an IRA the ability to convert it to a Roth IRA. In addition, under current law if you were eligible to convert, the conversion income would be taxed in the year of the conversion. That too will change for 2010.
"Congress really wants your money," Dubots explains. "They want you to convert so badly, they are giving away the farm. For conversions done in 2010 the taxes can be spread ratably over two years and included in income for 2011 and 2012. Yes, you read that right - you wonât owe any tax in 2010 (the year of conversion) and taxes due on a conversion done in 2010 are not included in income until 2011 and 2012! Thatâs like getting an interest free loan to build a tax free savings account."
Roth IRAs offer many tax advantages over traditional IRAs, according to Dubots.
Most importantly, the money that is withdrawn from a Roth IRA can be 100 percent income tax free. Also, the orignal owner is never forced to take require d minimum distributions from a Roth. And finally, unlike a standard IRA, qualified Roth IRA withdrawals will not trigger a jump in your Social Security taxable rate.
However, in past years, there were stricter regulations on Roth IRAs which prevented many people from being able to take advantage of them.
Tax laws that will take effect in 2010 have eased these regulations and now many more people are eligible to convert traditional IRAs to Roth IRAs, explains Dubots.
The tax laws are part of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was passed in 2006. Part of the TIPRA does not go into effect until 2010. This includes the provisions which make it easier to convert a traditional IRA to a Roth IRA, which is significant because it allows for tens of millions more Americans to be eligible to gain the benefits of tax-free income, according to Dubots.